Technical Analysis Is Important!

I once believed that stock prices are random and that nobody really can predict how stock prices will move in the future.  Since then, I have learned that investors can predict the stock prices, but not 100% of the time.  We saw this week that once S&P 500 reached 1044 level, it immediately bounced back and closed near the previous day’s close level.  What exactly happened here?  Why didn’t the stock market continue to decline?  There were many traders who lost money because they sold their positions or entered a new short positions at the bottom believing that the stock market will continue to decline.  Technical analysis would have prevented these traders from selling at the bottom.

The reason why S&P 500 started to rally instead of continuing to make lower lows is because investors all watch these levels from their technical analysis.  If investors in large sum all together watch for these support and resistance levels, then it is in a way fulfilling their own prediction.  Even the large fund managers decide to buy at support levels or short investors see support areas as their target and cover with a profit.  So the end result… the market goes up quickly.  Investors who understand this situation can profit from this knowledge!

However, not all situations will cause a rally when the support is reached.  What would happen if the stock market does not turn around and make a break out through the support level?  What should have investors done if S&P 500 continued to decline below 1040?  If S&P 500 breaks 1040 level and continues to decline, then investors need to start shorting as it would have continued to decline further.  This is because those investors who bought at 1040 level expecting a rally would had to quickly change their plan and sell their recently bought positions when there was a break at 1040 level.  At the same time, there will be a flood of new short investors entering the market to take advantage of this situation.  

Support and resistance levels can be very helpful and a lot of investors look for these levels.  With my limited experience in technical analysis, I will do my best to lay this out on Long & Short Investment.